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Daniel Snyder: Let’s get into guess the stock, everybody that’s here joining us maybe you’re here for the first time. Thanks for showing up, hanging out with us. So, what this is, I will just give you a few fun facts about a company that we’re covering today. Now, most of you probably don’t know what this is, but if you have an idea of what the company is or the ticker symbol, you can either use the name or the ticker, drop it down in the chat and we’ll let you know if you get it or if you are not that good at it.
But anyway, so starting this off, number one, this large cap tech company is based out of San Jose, California. It is founded in 1982 out of a garage. And this company is named after the creek that ran behind the founder’s house. The founders developed a technology called Postscript that all major printers use today for printing images. Now, this one’s interesting to me. Steve Jobs tried to acquire this company for $5 million in 1982. The founders turned him down, but eventually sold him shares for 19% of the company, plus a five-year licensing agreement for the postscript license making this company the first business in Silicon Valley to ever be profitable in its first year. We’re getting some guesses over here.
I got two more for you. The company IPO’ed on the NASDAQ in 1986. And this one is the one that blew my mind. On May 26th, 1992, one of the co-founders of this company arrived to the parking lot at work and was kidnaped at gunpoint by two men leading to a crazy hostage scenario involving the FBI saving the co-founder. Do you know that?
Austin Hankwitz: No, I didn’t know that. That’s crazy.
Daniel Snyder: You can go into it, if you want to. But yes, so one of the co-founders was literally held hostage in 1992. And like I think the ransom was like for $650,000 and they called his wife and his wife went through this whole paranoia thing. The co-founder started freaking out like it was a moment in time, so we got some guesses over here, man. Norm what the yep, so obviously, majority of you got it here today. Terence got it. Robert got it. Bruno got it. Greg got it as well. It is Adobe (NASDAQ:ADBE). Alan it is not HPE. Welcome to Adobe Systems Incorporated or as we know it now today Adobe, Inc. Austin, why don’t you go ahead and kick us off just a little detail about the company.
Austin Hankwitz: Before I kick us off, I just want to know how all these people know it’s Adobe, right? I am generally pretty well versed in the dark arts of the stock market. And if you were just telling me about this, this backstory, I wouldn’t have guessed Adobe, that’s so cool. I just, oh IT people know Postscript, got it Norm, that makes a lot of sense.
Okay, so what I’m hearing is everyone that guessed Adobe, right is an IT person.
Daniel Snyder: They work in IT, no I’m just…
Austin Hankwitz: Yep.
Daniel Snyder: Yeah.
Austin Hankwitz: Okay, let’s get into it, right. So, this week’s company is Adobe. Again, this is a company, I’d imagine we’re all loosely familiar with, but in case this is your first time hearing about the company, I’m going to drop some names of their products just so we’re all on the same page you’ve likely heard of them, right? Photoshop, Premiere Pro, Illustrator, Lightroom, After Effects and of course, Acrobat Pro. So, you guys all know we’re talking about, I would imagine, so let’s jump into it.
Adobe is a $155 billion company that operates three business segments: digital media, digital experience and publishing and advertising. Their digital media business segment is mainly the products I had mentioned before. These help anyone and everyone trying to create awesome images or videos. In this business segment reported making over $12.8 billion in revenue throughout the last 12-months. Their largest business segment by far. I think it’s about a 72% to 75% of all revenue.
Next up is their digital experience business segment. This is mainly technology that enables the customers with the ability to offer personalized digital experiences to their end users, right? This includes data insights, specific content built just for them, among other customer first products. This business segment generated over $4.4 billion in revenue over the last 12-months.
And finally, we’ve got the company is publishing an advertising business segment. Think of this one as kind of a catch all segment, I mean, if I were to describe it, I would describe it as that kind of like it’s just a hodgepodge of a bunch of different things you can think of, like web conferencing, e-learning solutions, high-end printing, I know Daniel talked about the image printing, web application development, it’s kind of just like a cool mixture here of really interesting services and products. It only made up 2% of total revenue over the last 12-months coming in at about $342 million, so a very small business segment.
Daniel, I think there’s a really cool image that we might have that, kind of, breaks down these business segments from a revenue perspective. Maybe we can pull it up. Not that one, not that one. I think it’s the one that oh gosh, what’s his name? He makes these awesome images for us all the time.
Daniel Snyder: Yes. I can maybe find out what slide number that is. Oh sorry, slide 10 Josh, go and pull up slide 10 for me if you can. Because this is — so this is our good friend Bertrand Seguin. And obviously, if you have been in the show for a long time, he’s been on with us, he will be on with us again next year, we want to get him back on. But he puts out these beautiful charts that really breaks down what the company does, how it makes money, where it spends its money. I mean, do you have things you want to point out here, I’ll let you take it away.
Austin Hankwitz: No, I just wanted to show everyone, like, really quickly, right. And this is over the last quarter, because, you know, the numbers I mentioned were annualized. But you can see just how big that digital media business segment is coming at about that 75% of revenue, then that digital experience coming in a bit less than that and that small, small publishing and advertising business segment.
Daniel Snyder: Yeah, absolutely incredible. And actually while we have this up. I want to go ahead and put in a couple of facts just, because we’re talking about the digital media segment, right? So, this company is full of acquisitions throughout its entire history, and it’s more recently that you’ve seen this expansion into these other publishing and digital experience and things like that. So, I’m going to give you a couple of facts that I found throughout its history. So, the first creative application program that Adobe ever released was actually Adobe Illustrator in the year was 1987. Photoshop actually was not even developed in-house, but rather it was acquired from the Knoll brothers, who licensed the ability for distribution to Adobe in 1988, and then later to Microsoft (MSFT) in 1993, which was interesting to me, right.
You think about like Windows was built for business. Apple’s (AAPL) main drive was Think Different be an artist, use our computer for this. So, it made so much sense for them just to team up early on. And Steve Jobs, right? He was the innovator as I mentioned earlier, he bought 19% of the company definitely a cool integration there. They didn’t invent the portable document format, which we now know in shorthand call it as PDF until 1991, which led to libraries being able to be archived due to the search for specific words feature that it introduced. So, imagine that before 1991, you couldn’t go to a web page and hit control F and finding search for words. Adobe’s PDF helped lead to that.
And then we talked about —
Austin Hankwitz: [Cross Talk] wild. I had no idea.
Daniel Snyder: Adobe Premiere right, which is video editing. Well, they didn’t release that until 1991. Adobe After Effects, which is the visual effects application was an acquisition that Adobe made in 1994 from the Company of Science and Art, who had initially created that. And then Adobe Audition, which is their audio mixing application, which is all this is digital media, right? That was another acquisition and the software was originally called Cool Edit Pro. So, they’ve been acquiring all these companies every, oh sorry, one more, I forgot about this — and this one’s really weird. So, they somehow managed to acquire their main competitor, Macromedia, right? Think about regulation, environment and everything they acquired their main competitor, Macromedia, which added cold fusion and maybe a little application that you might have heard of before called Adobe Flash.
Remember when Adobe Flash ran the Internet, all videos, games and everything was Adobe Flash. But what happened to Adobe Flash? The year was, I believe 2011 when they finally axed the Adobe Flash application altogether and moved to HTML5, but the back story is it’s all Steve Jobs fault, because he would not allow Adobe Flash to be run on the Apple iPhone due to his claims that it was not power efficient. And there were security concerns and it didn’t operate properly with the touch functionality the Apple iPhone was known for. So, after that, I think Steve Jobs wrote a public letter about it, actually. And after that moment, Adobe was like, all right, we’re getting rid of Flash, let’s focus on HTML5. This is all during the time of the transition to the web, which I’m sure we’ll talk about a little bit. From their applications being sold in boxes, the CD-ROMs putting on your computer, now it’s all web-based for the most part. And then they switched that entire business model leading to where we are today.
Austin Hankwitz: What a badass to just be able to say, you know what? Despite this powering the entire Internet, it doesn’t work good on my device. So, I don’t want this to happen anymore. That’s crazy to me. Jeez, all right, so let’s talk about, you know, Adobe from the business and we can keep this image up if you guys like. I think it’s a really pretty one.
So, you know, what is this, right? What’s the deal here? This is your tried and true SaaS company, one of the OGs right? I think Daniel mentioned that they IPO-ed several years ago. The company’s business segments, specifically digital media operate on a subscription model. For example, the digital media business segment is running at a $13.3 billion in annual recurring revenue, right? That’s so much money. Now compare that on to $8.7 billion in annual recurring revenue back just in 2019. It’s a 52% increase in ARR, the subscription revenue that investors love to see and only a few years.
And you know, because they’re a SaaS company, their gross profit margins are incredible, right? The whole company is running at 88% gross profit margins. You can see in this image that the digital media that, that specific subscription business segment is 95% gross profit margin. So, we love that. This 88%, though, for the entire company has expanded from 86% over the last two years, so there’s certainly margin expansion still happening in the business despite it being such an old, “old company”.
This margin expansion has aided their operating margin to grow over the last several years as well from $1.5 billion in 2016 to $6.1 billion this year, right. That’s a 4x in six years. That’s wild to me. But this is what happens when you build a business that has a suite of products, obtains countless sticky customers and then upsells their customers on new stuff every single year.
So, now, Josh, if you don’t mind flipping over to the other image of Adobe’s stock chart. I think it’s like a flat line.
Daniel Snyder: Slide 2 please. Yeah.
Austin Hankwitz: We’ll pull that up here in a second. But kind of to preface that, I got to be with you guys, right? Adobe’s stock price is in a death spiral. I mean, we just kind of see it peaked during this like late 2020, early 2021 era, and it’s just been a nightmare ever since. This is because I’d imagine a lot of COVID induced momentum happened during 2020, right? Everyone was going digital. We had to start running digital ads. We had to start doing website, like, everything was digital. So, that was, I would imagine the big momentum push during that time, but now that their net new ARR from that digital media business segment is beginning to slow down very much. I think it’s down 12% or 13% year-over-year and we have recessionary fears. I would imagine marketing, right, is one of the first things that people don’t spend money on. It’s when times are tough. I think a lot of Adobe’s business segments very well aid into marketing efforts. So, if no one’s spending money on marketing, what’s going to happen to Adobe?
Right. There’s a lot of reasons that investors are kind of scared right now. But you know, right now their stock is trading at about 20 times forward operating cash flow. Note, it’s operating cash flow, not free cash flow. Something that normally hovers around like in a 31 times range or– as you can see with this blue line, it’s “Historically Undervalued”. The black line is their stock price. The blue line is their projected operating cash flow growth. It’s forecasted to trend up 12% in 2023, 14% in 2024 and 16% in 2025. And according to their analyst scorecards, there’s an 86% chance that these forecasts are going to be correct.
Daniel, do you have any thoughts on just what this stock price has done over the last 12 months? It’s been – reminds me of Tesla over the last December, right? But it’s just been crazy to see how violently this thing sold off. And it kind of reminds me — I think, is it Warren Buffett that said the stock market is like a drunk, where sometimes it does crazy stuff to the upside and crazy stuff to the downside. But over the long term, it kind of levels itself out.
Daniel Snyder: Yeah. I mean, you laid out the perfect story, right? You had the rise in prices because everything went digital. We see in the grey bar there, that’s when COVID hit. And we had the brief COVID recession. I mean, the thing you also got to remember though is, stock is not the company, right? Stock prices fluctuate like you’re talking about, but it’s not the underlying company.
Now, there’s — I mean, you see the most recent cliff there that just happened based off of the most recent earnings, that was due to them announcing the Figma planned acquisition, which I’m sure we’ll talk about here in a little bit. So, yeah, there might be — I think it depends on your time horizon. And I was going to save this until the end, because I had to kind of like a recap I was going to do, but I think it’s worth mentioning here is that, so we talked about Bertrand Seguin. He put out an incredible article on App Economy portfolio, which you can find on Seeking Alpha as well, detailing Adobe, what’s going on with the revenue, highlighted moment from the transcript of the earnings call, things like that.
And he pretty much said that — all right. And this is a quote, “so where the price is now, Adobe has shaved more than $30 — $30 billion off of its market cap. So, any new investors to this company are essentially getting Figma for free if this goes through.” So, I think it depends on what your time horizon, right, as always. And then also, are you a shareholder already? Are you not? Or is this something that you’re into?
Austin Hankwitz: I like that perspective a lot. That’s really good segway into the Figma acquisition, right? So, investors, I think, were really caught off guard by this. And there’s a little bit of math that I did on the back end. It might not be a lot of guesses and a lot of estimations, but it kind of puts things in perspective, right?
So, about six months ago Adobe announced their intentions to acquire the software design company Figma for $20 billion. That $20 billion is going to be paid half in cash and half in stock, right? So, $10 billion cash, $10 billion stock. The company, weirdly enough though, only has $6 billion in cash and short-term investments on their balance sheet. I think it’s like keeping just $4 billion in straight cash, $2 billion in short term investments at the moment, which means it’s not unreasonable to expect that Adobe is going to have to borrow most of that $10 billion.
And if we assume that they borrow, maybe, let’s call it, I don’t know, $8 billion of that $10 billion in cash, interest rates right now for debt like this are hovering around this 5%, 6%, maybe even 7% range, depending on the debt instrument that they use, right? There’s a ton of different ways that they can raise this cash. But I’d imagine 5% for it is a very fair guess. That means 5% rate on $8 billion is a $400 million a year interest expense. That’s now coming out of the bottom line that investors have to account for. That’s a lot of money, right? $400 million a year.
But you might also say like, okay, awesome. But like Figma is going to do $400 million in revenue or ARR in 2022. It’s going to continue to grow. It will offset that. Like, sure, maybe like I think that’s a great way to think about it. But on the same token, it’s like, how is that going to change in 2023 if we do see a hard landing or some sort of recession?
You know, to your point Daniel, I think, all in all, the Figma acquisition is going to be a near-term headwind. I think that’s just to say the least, right? I think there’s a lot of uncertainty about this deal right now that’s keeping investors scared of what might happen. What’s that interest? How do I account for that? How much cash are we going to [indiscernible]with the stock? Is it going to dilute? Like, what does this mean? There’s a lot of just like stuff, questions, weird feedback that people are trying to figure out. But for the company of Adobe itself, right, and to our fellow marketplace friend, their quote there, you know, I’m optimistic. I think Adobe has a lot of awesome products. I like the company a lot. I use their products personally. My friends use their products. I think that Figma is an awesome company and I think they’re able to buy Figma and close the deal at a reasonable price. They’ll be an unstoppable monster. When I say with a reasonable price, I mean the interest expense, right? They’re going to be an unstoppable monster.
The question is, today at what price do you feel is fair from a risk reward perspective to pay for the stock? Right. You know, you had just quoted that, now it’s down $30 billion since the announcement of the acquisition. So, essentially you are getting Figma for free, right? That could be the case. Are you comfortable with that? I don’t know. Everyone has their own perspectives there, but I do think Adobe is a really cool company. Again, I use it. I love the margins. I love the subscription base. I’m okay to see that the net new ARR is slowing down. I think we had an insane 2020. I think you’re up against hard comps, right? There’s a lot of different reasons why I’m optimistic about Adobe in the long term.
It just comes down to how quickly can we get the specific details of the Figma acquisition figure out — figured out, disclosed and just wrapped up. I think once that’s done, the stock’s going to likely get much come back to historical norms, if that makes sense.
Daniel Snyder: Yeah, I’ve got a lot that I agree with and a few things that I don’t agree with. So, I [indiscernible] I’ve got this — we’ll call it the Daniel Deep Dive, right? Let’s just run through this, because you made a lot of good points and there’s a lot of questions that people might have right now. So, starting from the top end, right, revenue for the full fiscal year of 2022 was $17.61 billion. Okay. Well, how does that break out? Because they sell overseas as well.
While America makes up 59% of that revenue, 26% comes from EMEA, Europe, Middle East, Africa, and 15% from Asia. Foreign exchange headwinds, of course, we’ve been talking about that a lot lately. Hopefully that ends sometime soon, because it gets really annoying. Well, that knocked off 4 percentage points in this most recent quarter. So keep that in mind. If that can stabilize, that’s also going to benefit them.
Earnings per share was $3.60, but their gross profit margin is in the high 80’s. It’s like 89%. Actually, I’ve got one of those slides. Josh, can you go to slide –let me see what the slide number it is. We’re going to go ahead and look at the growth grade here of Seeking Alpha. At slide number eight, the profitability here.
So, it’s 87.70% is the gross profit margin. I mean, that is unheard of compared to the overall sector. The 5-year average has been 86%. They’re growing the gross profit margins, share is not by much. But look at that. The sector median is only 49%. So, they’re definitely able to profit off of everything going on no matter what. So you talked about the $400 million in interest expenses. Yes, that’s going to be an issue. However, S&P Global, Moody’s, both have a great credit rating for the company. You mentioned they had, what was it, $6 billion in cash and cash equivalents with investments $6.1, long term debt of 3.6 billion for this company. The dollar based net retention was greater than 150%. Of course, meaning that, revenue from existing customer grows by 50% year-over-year net of tax. That’s very favourable, right? They just raised the prices of Creative Cloud. The digital media side of things. I think it was like buy $50 for the year. But it goes back to like when we were talking about…
Austin Hankwitz: Wait, wait, wait, the 150% I thought was for Figma. Is that for Adobe as well?
Daniel Snyder: I think I pulled it directly from their — I think that might have come from App Economy portfolio.
Austin Hankwitz: Interesting. Okay. Because I was just…
Daniel Snyder: I can double check that and get back to you. Yes, there — actually was that. Maybe — I’m pretty sure it’s for Adobe. It was from their Analyst Day, most recently back in, I think, it was October that they held. I things where I pulled that actually, so anyways the financials are very strong overall. Let’s go ahead and go back to the previous slide. Josh is the valuation grade here on Seeking Alpha as well. We’re going to kind of go backwards, usually I go forward, but obviously, I mean like there’s your [indiscernible], there’s your peg ratio, everything else is looking pretty favourable, even though the Adobe valuation is a D+ right now.
Obviously, it’s one of those — it’s a software company, right. Maybe it’s going to stay overvalued, but the profitability is through the roof. I like where this company is headed. Let’s go ahead and go back to the summary for the ratings from Seeking Alpha, that Slide 3, Josh, let me just give everybody the full rundown. So, Seeking Alpha authors on this stock currently have a buy. Wall Street analysts across the street all on average hold a buy and the Seeking Alpha quant system is a hold.
And then, let me give you one second. Take a quick look at that. There’s a numbers for you as well. Next slide, please. For the fact of grades, valuation is a D+, growth is a D+. Well, if you’re acquiring companies, if you’re strategic and I mean, look at the stock price. They’ve been doing it time and time again. Profitability, A+, momentum is a B, obviously, all the stock pullback at the prices that as we’ve been mentioning. And then, of course, the revisions on the street are D+. And that’s more recently, ever since the Figma thing. But when it comes to Figma, and we’ll dive more into this in a second, it’s like they — I think they had to buy Figma, right?
Austin Hankwitz: Oh, they had to. They had no choice. That’s just like with Apple buying Beats by Dre, right? If Apple wanted to have those AirPods actually be a thing, you know, it wasn’t cool, but they had to buy Dre — Beats by Dre to completely shut down, buy and let it die. I don’t think that they’re going to let Figma die, right? But like, I think that they had no choice, 100%. [Multiple Speakers]
Daniel Snyder: On the point of that, imagine like being Apple having worked on the R&D of AirPods for years and spending all this money and then looking at Beats and being like, Oh crap, we’re screwed. Like, what we do here, while we have to acquire them. Like, let’s try to get them for the cheapest amount we can.
Now, going into the Figma acquisition real quick. So, the product just came available to the public in 2016. This is for Figma, between April 2020 and May 2021 Figma valuation increase from $2 billion valuation to $10 billion. Roughly 4 million people use Figma, including big tech companies like Dropbox, Rakuten, Slack, Twitter and Volvo. So, you’ve seen a lot of big customers backing this competitor of yours. And oh, by the way, let’s go ahead and go to slide numbers. Stick with me one second. This is straight from their investing deck. Slide number 16, Josh, and through that. We’re jumping all over today. There’s so much the creative in the story here. And we go to slide number 16, we can talk about, they started as desktop applications, right?
So, as you can see here, you’ve got Photoshop, Lightroom for photos, Audition for audio, After Effects, Visual Effects, Media Encoder Premiere for video editing. You got Dreamweaver, you got Illustrator, you have all of these great applications they built and they’ve been converting them to mobile apps recently. As you know, Photoshop can be used on the iPad, Lightroom as well.
They’re working on transitioning these things, but now they’re going for web-based applications, so that they can get rid of having the application run on a personal computer all together, if not needed. Put everything in the cloud, put everything in the browser, have somebody go to a browser through a website and bada bing, bada boom, there you go, then you leverage Adobe Cloud, let them store all their files in there, creating that stickiness effect.
Well, I can’t leave Adobe. They have all my photos, they have all my videos, they have all this X, Y, Z. You’re creating that stickiness with the customer, right? What I see here on the web-based applications is, they don’t have Dreamweaver, which is the web building — I believe it’s their web-based building kind of software that they use, it’s not web based yet. And you just see this Figma Corporation come up, released their application, everybody starts a adapting it, creating websites in Figma. Oh, by the way, it’s almost a little bit like an Illustrator. And oh, by the way, it’s almost a little bit like a Photoshop. So, of course you start to see this competition coming on here. So what do you do? You buy them at whatever cost you got to buy them, just to shut them down.
Which is the same thing Adobe did. If you remember what I said earlier, when they bought their competitor Macromedia, which gave them Adobe Flash, that was their biggest competitor at the time when they were able to get the acquisition through.
So, this Figma acquisition could be huge for them. And while we’re talking about that, I was going to do an Adobe breakdown. So, let’s talk about their competition. Who’s their competitors, right? For video editing, you have DaVinci Resolve, which is a free based video editing application which apparently is starting to really pick up steam. And then you have Apple’s Final CutPro, which used to be really great, and now it’s kind of joined it out.
For website building, of course, there’s like still Squarespace, there’s Wix, there’s out of box applications. But when you really want to customize something, most people turn to Figma.
For graphic design you have Canva, which is like that huge female led company. I think it’s out of Australia. Actually massive valuation, not public yet, but there still is that which might be in favour for Adobe with them trying to acquire Figma, because they can say, hey, we’re not going to monopolize this, obviously, there’s Canva over here, they can still do graphic design, they can still work on that. So, that was interesting. Then you have everything in the 3D space, right? They have a couple 3D applications when you can go in and you can model 3D, whatever, trees, locations, people, characters.
Well, the world of 3D is also run by Unreal Engine and Unity applications, so they have competitors there.
And then from the AI perspective, because they have what’s called Adobe Sensei, which is completely revolutionizing and like the way to remove things out of images in Photoshop or completely almost, you know, scene edit detection in Adobe Premiere, you can equalize your audio for you. Like they’re just trying to create the inefficiency and they are leading the charge with Adobe Sensei. I mean they can caption video files for you based on their cloud service. I mean, they are doing a lot of stuff great there. But you know who else is doing AI images? Can you say DALL-E 2from OpenAI? It doesn’t really work.
Austin Hankwitz: Yeah.
Daniel Snyder: All competition everywhere yet, but they do have a lot of competitors, which might help them squeeze this acquisition through the regulators. Right? Talking about regulation, they are regulated in regards to the US government, Europe, other jurisdictions that they operate in. So, there is that. Let’s talk about their suppliers. Right? Who are their suppliers? Well, they’re digital, but they’re not digital on just one cloud provider.
They started with Amazon (AMZN) Web Servers, and then in 2016 they announced their link in a deal with Microsoft’s Azure, and they’re spreading out across cloud computing systems to get everything web based so that no matter where you are in the world, you can ping to the nearest web development centre and still have incredible speeds. Brilliant, guys are absolutely brilliant.
So, the customers — so many customers, I don’t even need to go down that path. And lastly, I want to talk about management. This guy, the CEO right now, I am totally ambushed at this name, Shantanu Narayen, I hope is somewhat close to how you say it. So, who is this guy? This guy is incredible. So, he was born in India, raised in India, came to the States in 1986.
He joined a Silicon Valley start-up called Measurex Automation Systems, which made computer control systems for automotive and electronic customers. He then moved to Apple. Hello, Steve Jobs, Right? Weird. Is it weird? It’s weird. Where he was in senior management positions from 1989 to 1995.After Apple, he served as Director of Desktop and Collaboration Products for Silicon Graphics. In 1996, he co-founded Pictra Inc, a company that pioneered the concept of digital photo sharing over the Internet. Hello, he was doing photos, he wasn’t doing YouTube, and then he joined Adobe in 1998 as a senior Vice President of Worldwide Product Development, which he led through 2001, from 2001 to 2005 he was Executive Vice President of Worldwide Products. And then in 2005 he was appointed President and COO. And then in 2007 he became CEO where he has led the charge of getting applications off your computer and towards the cloud. The guy’s been here forever. He is a…
Austin Hankwitz: Let me add too Daniel. I believe, I could be a little bit wrong on this, but I believe he is a top five, if not, the number one highest rated CEO on Glassdoor. Seriously.
Daniel Snyder: Really?
Austin Hankwitz: Yes, he is number one or like top five. I remember I did a TikTok video about this, because I think there’s an ETF coming out of like the best highly rated CEOs in investing in their companies. And I was like, so let’s figure out who they are. And I think number one was the CEO of Adobe.
Daniel Snyder: That is very — I mean, the guy’s been around for a while. And like, obviously, they had this big conference called Adobe MAX, they do every year, which I always tune into being a content creator looking to see what they’re coming up with next. They have tons of stuff in beta. I mean, then you go into it — I mean, I touched on a lot of the digital media side of things, right? I didn’t talk about the documents where they had the ability to compete against DocuSign, with the ability to sign contract in your software. Then you have the Adobe Experience, which is analytics across the web, which is transforming how businesses run and operate and how they design their websites, knowing all the data that’s there.
I mean, this company is completely leading the charge still within the entire information technical sector. So, lastly, the two things I want to point out and then I want to look at the stock price real quick on the charts. The interesting thing to me is that, this company doesn’t pay a dividend. Did you notice that?
Austin Hankwitz: I did notice that. I did notice that. And I understand why, right? I mean, like, I think it was in 2013 or 2014, they really flipped toward the subscription model. Right? And because of that, we had $1.5 billion or so in 2016 in operating income. Now it’s up to $6.5 billion. That’s growing a lot. But just think about it, 4 or 5 years ago in a company that’s 40 years old, that’s a very short period of time. And they’re just now sort of “profitable”. Right? So, I understand why they’re not paying a dividend, but I would hope to see a dividend if they’re going to stay on this track, especially from my operating cash flow and free cash flow perspective.
Daniel Snyder: Yeah. And then the other thing I just wanted to point out for everybody is their next earnings. They wrapped up their earnings for this year. Their next earnings call will be March 15th after the close. And, you know, I’m going to be waiting for that one, because this company is still incredible to me. I mean, personally, I think Figma acquisition — I think this acquisition will close. And I know they’re anticipating for it to close this next year. I would highly think that — I agree with that, just based off of there’s still a lot of competitors within that space. They still can claim that, hey, we’re not creating monopoly, we’re just blending synergies. But I mean, they’ve got Frame.io. Oh, I’d even point out that slide, Josh…
Austin Hankwitz: They got Frame.io?
Daniel Snyder: They bought Frame.io. Yes.
Austin Hankwitz: No way. Okay. Now I’m just more excited. This is crazy.
Daniel Snyder: I have a slide here. There’s so many slides. I should have completely did this out of order. Stick with me, guys. But let’s see here. Slide number 17, please, Josh. And this is just going through the history. You’ll see the timeline at the bottom from when it started in 1982 to 2022. It doesn’t have everything here. But on the far left side, of course, you had them starting with Postscript and then Adobe Photoshop, which they acquired the licensing deal to distribute. Then they invented Adobe PDF, they bought their competitor Macromedia, giving them Flash. Then you go on [indiscernible] and you go in the cloud when they started the cloud space. And more recently you see the color little at the top there and that’s what they’re calling Adobe. I think it’s Express, if I remember correctly, that’s the competitor to Canva actually, right?
It’s like go to a website expressively, like create your little social media post, your graphic for your business, whatever it is. Think that’s what that is. And then, of course, Figma, where we are today. But yeah, they’ve got Frame.io. They’ve got — they’ve acquired a ton of people along the way, just like Apple. I mean, the company has a great roadmap ahead of itself.
DaVinci Resolve from the video editing standpoint, I will say, is a competitor that continue to see to grow here. But will that crush every other part of their business? Absolutely not. So, I think it’s really nice what they’ve set up. I love what the management’s done here. I love the share price here. And saying share price, let’s go and look at the chart real quick. Josh, would you mind taking that slide down for me?
Austin Hankwitz: [Multiple Speakers] to ask you, Daniel. You know, you gave me this really good walk through the Daniel deep dive. And you said you like the share price here, right? So, what’s the price that you’re buying at? What’s the price that you’re happy to say, you know what? I’m picking up some shares.
Daniel Snyder: So, let’s look at this. Right? So, this is right now the weekly chart which we’re looking at. And I went ahead and marked a few things. The white dotted line hereat the bottom is the COVID low. Okay. So, obviously, we’ve seen a massive increase. What you saw earlier is bounce along the 20 day, 50 day because everybody was doing everything from the web. Everybody was at home. Adobe Creative, I mean, think about it. Video editors, graphic designers, everybody became hot demand for every business, everywhere. And of course, we’ve seen this pullback. Let’s go into the daily chart and you’ll see what all these other ones are. There’s a lot of gaps on this chart, right?
You know, I talk about gaps, 80% of the time they fail and then 80% of the time they also reverse course on either a gap fill or the bottom or top of the gap. There is always things to watch. They are just for initial price reactions. What else do we have here? We have massive gaps above the market from earlier this year. Let’s look at more recently what’s going on here. So, volumes turn down a little bit, but we’re seeing this what some would call another pattern here, it’s just consolidating. Okay. What does this consolidation mean? This consolidation means that there’s going to be a nice price move come in one way or the other. Okay. Obviously, we’re in the middle of this gap. There’s a gap below the market. There’s a gap above the market. We’ve got some moving average convergences here. We got the 20, the 50 and the 100 all converging in the same place talk about massive consolidation.
And so, obviously I’m watching a couple of Fibonacci levels here. This goes back from August 16th to the lows here around September 30th. Of course, weird price action, right? Going back to when they announced Figma, when you saw the massive fall off in share price, because what did they say? We’re going to have to take on debt. I mean, I think it was the exact quote they said, we know we’re going to have to take on debt in order to get this close. We then do short term debt instruments and use some of our cash to finance the acquisition as well as the share price — sorry, the shares like you mentioned. So, of course, that’s going to dilute existing shareholders. Maybe not everybody agrees with this, etc.
But I think here at this level, you know, I’m continually to watch the valuation overall, the growth metrics here on Seeking Alpha as well, but that profitability is huge. The profitability of this company and having 80% of gross margin, I mean, that opens up the cash. And not to mention, they’re still doing share buybacks.
Austin Hankwitz: 88% of gross margin. Yeah.
Daniel Snyder: 88% gross margin. And the share buybacks, which they authorized $15 billion of which in December of 2020, they haven’t used all of that yet and they have until 2024 to use an additional $6.5 billion that was approved in order to do share buybacks. So, I mean, there’s a lot to like personally in my own opinion. So, I think I would personally start to nibble around this area. I mean, obviously, I’m not one to go and jump into a full position right away. That’s not how I personally invest. I would 100% start to scale in, but dictated overall with the weighting of the information technology sector that I already have in my portfolio.
Austin Hankwitz: I think that’s totally fair. I’m right there with you. You know, I — I’ve been so excited, but I remember when Adobe was like $600 bucks a share, $500 bucks a share. I was just — I just remember how excited I’ve been about waiting, being patient. I mean, we saw this coming, there technology stock. We saw a lot of multiple compression and earnings compression over the last 12 months. I’m pumped. I do plan to continue expanding my position. Right now, it’s very small. A couple of shares. Right? But I have every intention as the stock continues to consolidate or either kind of crab back and forth to expand my position. Full transparency, that’s where I’m at.
Daniel Snyder: Love it. Josh, let’s go. I got one more slide for you guys. Can we get to slide 20, Josh. I just got to show you this, because when I think about, are companies going to leave this company for graphic design and everything else, the Adobe Experience, the PDFs, the digital media side of things, which we saw earlier, was — let me just go back and reference real quick to give you the exact number. Digitalmedia was 95% gross margin and brought in $3.3 billion this year on the income statement. I mean, it’s just like a complete powerhouse. You look at all these companies here and you just recognize all of them, right? They just stand out to you. DHL, General Health Care, UnitedHealth Group, Marriott, Nike, Sky. I mean, it’s like — these are powerhouse companies that are all just channeling some of their expenses into Adobe’s revenue. And that just makes me happy.
Like, I look at that, these are really solid companies. So, just something for everybody to keep in mind. Hopefully you enjoyed the research that we presented to you today. Josh, [indiscernible] that last slide for me.
If you guys have stock ideas that you want us to cover on the show, [email protected], you can email us. Of course, we would love to have you leave us a rating or review on Apple Podcasts as well. We wish you all a happy holidays. Let us know if you are — if you like Adobe at these levels. I like Adobe at these levels.
Austin Hankwitz: I love Adobe at these levels. I do. I do.
Daniel Snyder: Hopefully everybody here love the deep dive today. Norm, thanks for hanging out with us. Excellent analysis as usual guys. Appreciate you Norm. Alan says Happy New Year. Happy New Year right back to you. Everybody stay safe the rest of this week. Enjoy the low liquidity week. Don’t look at the screen. Go hang out with family and friends. But we appreciate you guys showing up and hanging out with us.
Off topic, what happened to Mike Saul? Unfortunately, we did sunset the Mike Saul webinars, it makes us all very sad, but we appreciate that you’re here now. So, without further ado, Austin, Anything else?
Austin Hankwitz: Good. Happy holidays. Hang out.
Daniel Snyder: [indiscernible]
Austin Hankwitz: We are having fun man. Absolutely. We actually just did a deep dive into the what will soon be a $2 million portfolio by the end of the decade. We’re investing between $100,000 and $150,000 toward it just this year. So, if you want to see what that looks like, if you want to see the holdings specifically, check out Cash Flow Freaks.
Daniel Snyder: I love it. I’m going to check it out. And maybe we can talk a little snippet of it here next week Wednesday 12 PM Eastern.
Austin Hankwitz: I like that.
Daniel Snyder: We’ll see you guys there. Josh, let’s get on out of here man.